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Chapter 12: Q16RQ (page 655)
What are the two categories of liabilities reported on the balance sheet? Provide
examples of each.
Liabilities are classified into current and long-term liabilities.
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Determining the present value of bonds payable and journalizing using the effective-interest amortization method
Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payment of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.
Determining bond amounts
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payableat 99.5. Interest is paid semiannually.
Requirements
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
Reporting liabilities
At December 31, MediStat Precision Instruments owes \(52,000 on Accounts
Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat
also has \)300,000 of Bonds Payable that were issued at face value that require
payment of a \(35,000 installment next year and the remainder in later years. The
bonds payable require an annual interest payment of \)4,000, and MediStat still
owes this interest for the current year. Report MediStat’s liabilities on its classified
balance sheet on December 31, 2018.
How does compound interest differ from simple interest?
Retiring bonds payable before maturity
CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annualinterest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payableat July 31, 2021.
2. Assume all amortization has been recorded properly. Journalize the retirement ofthe bonds on July 31, 2021. No explanation is required.
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